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CIO VIEW
Macro Perspectives
Marketing Material
January 24, 2020
PETER DORALT, POLITICAL ANALYST, MACRO GROUP
AN EARLY ROADMAP TO U.S. POLITICS IN 2020 AND BEYOND
We take an initial stroll along the campaign trail heading towards the U.S. elections in November –
and tell you what signals to listen up for in all the noise likely to head your way.
We provide a representative sampling of the overall 2020 electoral outcomes you may currently want to consider
IN A NUTSHELL
when making investment decisions.
Most likely, the outcome may be in what we call the Mushy Middle (epitomized by various combinations of a
divided government).
Statistically speaking, Trump can be considered an accidental president. But he is also a very unusual candi-
date, who should not be underestimated.
For political aficionados, one prediction can safely be made 78,000 votes (or 0.56%) out of 14m votes cast in those
already at the outset of 2020: it promises to be another states.1 We will take a more detailed look at the Electoral
bumper year full of excitement. In such an environment, it College starting in Section 3. In the meantime, it's important
seems quite likely that markets will occasionally take fright, to start by recalling how narrow Trump's path to victory was
whenever an emerging apparent trend catches them by in 2016, compared to winners in previous contests.
surprise. Old hands on Wall Street, however, recognize that
Looking back at all presidential elections since 1984, the
it is far too early to assess which, if any, major policy chang-
average winner garnered 50.3% of the popular vote. Be-
es might be in the offing beyond 2020. Indeed, a good, initial
tween 1984 and 2012 (i.e. excluding 2016 and Donald
approach – at least until Labor Day 2020 – might well be not
Trump himself), the average winner's vote share was
to get carried away by political headlines.
50.9%, i.e. only marginally higher. Trump received 46.1%,
For political data nerds like ourselves, the task is some- despite the absence of strong third-party candidates (such
where in between: It is telling what signals to listen up for in as Ross Perot in the 1992 and 1996 presidential elections).
all the noise in the coming months. And it starts with briefly Not that Hillary Clinton was doing all that much better as a
looking back at 2016. In addition, we assess U.S. polling, vote getter than Trump. As we described in our 2016 CIO
take a first look at what else may be at stake, share our fa- View Special, both Mr. Trump and Ms. Clinton had histori-
vorite sources of information and provide our own probabil- cally low favorability ratings.2 To paraphrase the old saying,
istic assessment on three market-relevant types of out- both 2016 candidates arguably managed to come in third or
comes. And, if that is still not enough to sate your appetite fourth in a two-horse race. Trump's share of the vote was
for political forecasting, we conclude with a reading sugges- barely higher than that of Michael Dukakis in 1988 – and
tion likely to serve you well in 2020 and beyond. below that of the losing candidates in four of the last five
presidential elections (see chart 2). And, despite population
1. THE MEANING OF 2016 growth, the number of votes for both Clinton and Trump in
Statistically speaking, Trump can be classified very much as 2016 lagged behind Obama's 2012 and well behind
an accidental president. In Michigan, Pennsylvania and Wis- Obama's 2008 vote totals (see chart 3).
consin, the three states that propelled him to victory in the
Electoral College, he was ahead by a mere combined
1
All historical data is based on the information released by the Federal Election Commission, available at: https://www.fec.gov/introduction-campaign-finance/
election-and-voting-information/
2
See: https://www.dws.com/en-us/insights/cio-view/americas/our-us-election-watch-2016-09/?setLanguage=en-us It is still well worth a read, especially on
many of the longer-term structural trends we will not have space to cover in the present publication.
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) / 1Macro Perspectives / January 24, 2020 CIO I VIEW
CHART 1: POPULAR-VOTE SHARE IN U.S. PRESIDENTIAL ELECTIONS SINCE 1984
Source: Federal Election Commission as of 12/19/19
Winners' shares delineated in orange. Dashed line marks the average winning percentage of 50.3%
CHART 2: LOSERS AND TRUMP
Source: Federal Election Commission as of 12/19/19
So what, you might well ask. Trump still won 2016. The ner did not receive the most votes in the general election
trouble is that the way he won raises serious doubts about (1876, 1888 and 2000). Among these previous "popular-
how much to read into his victory for 2020. Back in 2012, vote losers," only George W. Bush was able to win re-
conservative commentators were keen to point out that in- election (and he had only lagged by a modest 0.5%).
cumbency by no means guarantees re-election: "History
So, it's hard to say how much to read into that 2016 victory
shows that whenever once-elected presidents seek a sec-
for 2020. Trump's victory in 2016 is arguably unprecedented
ond chance, more often than not the people say no." 3 As
in modern times. This is not just because Trump was an
with any verdict electoral "history" delivers, we would urge
unusual candidate, with an unusual voting coalition. How
some caution, especially when "history" is viewed through
Trump voters were geographically distributed was critical to
partisan lenses.
his success in the Electoral College.
Other than Trump, there have only been 3 instances since
the American Civil War in which the Electoral College win-
3
https://www.thedailybeast.com/for-us-presidents-odds-for-a-second-term-are-surprisingly-long?ref=scroll
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) /2Macro Perspectives / January 24, 2020 CIO I VIEW
CHART 3: WINNERS AND TRUMP
Source: Federal Election Commission as of 12/19/19
At least part of the reason incumbency was helpful for a such patterns to become more clearly visible in the polls,
candidate like Obama in 2012 is that he could afford to lose much as they were after the Kavanaugh controversy.
plenty of voters (almost 3.6 million, as it turned out) and still
The state of U.S. polling in general is also an important con-
comfortably win re-election. Trump, by contrast, has no
sideration in thinking about how to interpret new information
such margin for error. We return to what all this might mean
in coming months. As we wrote ahead of the mid-term elec-
for forecasting purposes in Section 5.
tions of 2018: "U.S. elections are quite unusual in that you
2. U.S. POLLING AND HOW TO THINK ABOUT TRUMP'S have a wealth of historical data, plenty of high-quality poll-
CHANCES OF GETTING RE-ELECTED sters and a vibrant community of data-driven analysts and
commentators. A data-driven, probabilistic approach to pre-
At the time of writing, the impeachment process is still un-
dicting and analyzing electoral outcomes was pioneered by
folding in the Senate. For forecasting purposes, we see the
Nate Silver and https://fivethirtyeight.com/. Quite a few oth-
Senate trial as a bit of a side show. It remains very unlikely
ers have embraced a similar approach. That is one of the
that enough Republican Senators (who control that cham-
reasons covering U.S. elections is both easier – because
ber with 53 out of 100 votes) will consent to convicting and
we have to do less number crunching ourselves – and more
removing President Trump from office.4 And while it is pos-
fun – because there are plenty of knowledgeable commen-
sible that some swing voters might see impeachment as a
tators."5
stain on his performance, it is at least equally plausible that
the Senate trial might help Republicans consolidate and Three key articles of faith among those U.S. commentators
mobilize their base in November. are that, first, even high-quality surveys can suffer from
polling errors of unknown magnitude and direction. (When
It's even possible that both things might happen at the same
such misses happen, they tend to reflect methodological
time, with the politics playing out differently on the ground in
choices and biases in the raw data used, rather than ran-
different parts of the country. Something similar happened
dom sampling errors). Second, averaging large numbers of
ahead of the 2018 midterm elections, following the acrimo-
polls and weighting polls to reflect both sound methodologi-
nious Senate hearings of Brett Kavanaugh for a seat on the
cal choices and forecast accuracy in past elections can
Supreme Court. The ensuing controversy over sexual-
mitigate against this risk. It also provides valuable insights
assault accusations came at a critical point of the cam-
into how large polling errors have been in the past, and
paign. It simultaneously appeared to contribute to Republi-
whether polls in general for any particular type of race have
cans consolidating and turning out their base in key Senate
gotten better or worse. Third, though, it is widely seen as a
races and to the problems Republicans faced in retaining
mug's game to try to guess either the magnitude or the di-
female supporters in suburban House districts.
rection of a suspected polling error in the U.S. context.
Or, of course, other events such as escalating tensions in
For all political forecasts we have been doing around the
the Middle East, might leave impeachment a distant
world, we broadly subscribe to articles one and two. But we
memory for most voters, come November. In any of these
tend to be a bit more agnostic than our U.S. peers when it
cases though, there will most probably be plenty of time for
4
A two-thirds majority of senators – 67 if everyone votes – voting to convict would be required to remove Trump from office.
5
See: https://www.dws.com/en-us/insights/cio-view/americas/us-midterm-elections-2018/?setLanguage=en-us That too is still well worth a read, not least to
give you an idea of how good our own forecasting record has been.
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) /3Macro Perspectives / January 24, 2020 CIO I VIEW
comes to their third article of faith: the idea that you should bluntly, we believe those pundits who gave up on polling in
never be in the business of trying to guess both the magni- the aftermath of 2016 generally don't know what they are
tude and the direction of ways in which a country's pollsters talking about and still haven't bothered to find out. Read
might be getting things wrong. We agree that trying to them for entertainment, if you wish, but you might not want
"unskew" U.S. polls is generally a bad idea, for reasons well to rely on them when considering investment or any other
explained by CNN analyst Harry Enten a few years ago. 6 decisions that require forecasting skills.
However, our experience outside the U.S. suggests that in For forecasting purposes, we believe a better one-stop
countries where much of the polling is truly dodgy, cautious- source in the U.S. is FiveThirtyEight, which has built up a
ly second guessing the pollsters can improve forecasting solid track record over different cycles and races. Of course,
performance. For example, in Italy, most polls have been that does not mean their – or any other – poll-based anal-
notoriously unreliable for many years. In others, such as the yses and forecasts will always get it right. Indeed, we will
UK and France, there are good reasons to think that polling probably highlight quite a few of our favorite sources in the
has gotten harder, making purely polling-based forecasts course of this campaign, as well as our own areas of disa-
less reliable than they used to be. Based on such experi- greement with consensus forecasts. Nevertheless, we sug-
ences, we are a little more willing than our U.S. colleagues gest keeping an occasional eye on FiveThirtyEight. If you
to occasionally go out on a limb, especially when there are only want to follow one or two indicators to cut through the
tentative hints in at least some polling data or recent elec- political noise, the first that you might want to look at is the
toral events of what might be going wrong.7 FiveThirtyEight Trump approval and disapproval tracker,
available at: https://projects.fivethirtyeight.com/trump-
Occasionally, that may even be appropriate in the U.S. For
approval-ratings/?ex_cid=rrpromo
example, the Democratic win in the 2017 Alabama Senate
race offered an indication of how most pollsters had been Helpfully, this tool also allows checking how Trump's num-
underestimating the extent to which the Trump presidency bers compare with past presidents at this stage of the presi-
would boost turn-out among Democratic leaning groups, dency. To some extent, re-election battles are always a
notably younger voters. referendum on the incumbent's record, not just a choice
between different visions for the future. Trump's numbers
The snag is that U.S. pollsters usually pick up on such
suggest that both he and other Republicans might be vul-
trends before too long. You can see this quite clearly in the
nerable. After all, much more is at stake in 2020 than just
helpful analyses of polling accuracy and signs of partisan
the presidency.
bias Nate Silver publishes every few years. Up until now,
the results have invariably tended to indicate that: "Poll Av- 3. THE SENATE, THE HOUSE AND THE ELECTORAL
erages Have No History of Consistent Partisan Bias (…) the COLLEGE
historical evidence suggests that it is about equally likely to
In 2018, Republicans lost their majority in the House of Rep-
run in either direction"8 (as of 2012); and that (as of 2018)
resentatives, but made a net gain of two seats in the Sen-
"The Polls Are All Right (…) Over the past two years —
ate.11 The result, once again, was a divided Congress and,
meaning in the 2016 general election and then in the vari-
therefore, a divided government for the last two years of
ous gubernatorial elections and special elections that have
Trump's first term in office. As we pointed out in our 2016
taken place in 2017 and 2018 — the accuracy of polls has
CIO View Special from which parts of this paper are
been pretty much average by historical standards." 9 In fact,
adapted, America's founding fathers were assiduous in
"the 2017-19 cycle was one of the most accurate on record
avoiding any one person or branch gaining too much power.
for polling. (… In 2017-19) polls had essentially no partisan
Hence, the emphasis on checks and balances.
bias, and to the extent there was one, it was a very slight
bias toward Republicans (0.3 percentage points). And that's The idea behind having two chambers was that representa-
been the long-term pattern: Whatever bias there is in one tion in the House should be based on population. By con-
batch of election polls doesn't tend to persist from one cycle trast, six-year, overlapping terms in the Senate would act as
to the next."10 a brake on rash schemes. Having two Senators each would
also ensure that small, less populous states could make
All of which suggests that in 2020, U.S. polls should be tak-
their voices heard in Washington.
en seriously. Indeed, loudly stated distrust of polling in gen-
eral among many pundits is quite a good and reliable indica-
tor of which pundits you may be better off ignoring. To put it
6
https://fivethirtyeight.com/features/the-polls-arent-skewed-trump-really-is-losing-badly/
7
To take one example of such hints, consider the 2019 UK general election. During the recent campaign, about one in five of Labour's voters failed to recall
their previous voting decision correctly, when prompted by pollsters in recent months on how they had voted in 2017. Such conscious (or more likely uncon-
scious) "buyer's remorse" offered an early, and, as it turns out, reliable indication of the larger-than-expected collapse in the Labour vote in many seats it had
held for decades. For details, see: https://dws.com/insights/cio-view/cio-flash/cwf-2019/over-to-you-brussels/?setLanguage=en-us
8
https://fivethirtyeight.blogs.nytimes.com/2012/09/29/poll-averages-have-no-history-of-consistent-partisan-bias/
9
https://fivethirtyeight.com/features/the-polls-are-all-right/
10
https://fivethirtyeight.com/features/the-state-of-the-polls-2019/
11
As already mentioned, Republicans currently hold 53 Senate seats. There are 45 Democratic Senators, plus two independent members of the Senate, Bernie
Sanders of Vermont and Angus King of Maine, who caucus with the Democratic Party. Effectively that means that the chamber is split 47 vs. 53. Unless other-
wise stated, our source for all Congressional seat counts and election results is https://ballotpedia.org, which has a wealth of useful data.
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) /4Macro Perspectives / January 24, 2020 CIO I VIEW
SOME QUIRKY FEATURES OF DEMOCRACY IN AMERICA
In the U.S. electoral system, oddities abound. Long before rural bias is quite small for the Electoral College as a
the Trump era, the world was reminded of that in the 2000 whole and can potentially benefit either one of the two big
election, when Al Gore won the popular vote, but ultimate- parties. The vast majority of its 538 electors come from
ly lost the Presidency after the Supreme Court stopped a states with large populations, with California (55 electors),
recount in Florida. Most states award electors on a “winner Texas (38), Florida and New York (29 electors each) hav-
-takes-all” basis through the Electoral College, which ing the most sway.
chooses the President and the Vice President. (The ex-
Of course, the impact of this federal structure and rural
ceptions are Maine and Nebraska, where some electors
bias is much larger when it comes to the legislative pro-
are picked at the level of congressional districts.)
cess than it is in the Electoral College. Currently, seven
Casual observers might be less familiar with some other out of 50 states have only one Representative (as well as
quirks of the U.S. political system. In particular, the num- the standard two Senators): Alaska, Delaware, Montana,
ber of electors in the Electoral College is based on the North Dakota, South Dakota, Vermont and Wyoming. And,
total number of Senators and Representatives. Since each as below chart shows, there are plenty of other small or
state – no matter how small its population – has at least sparsely populated states with fewer than one million resi-
one Representative and two Senators, each gets at least dents per U.S. Senator.
three electors. It is worth keeping in mind, though, that the
Resident population in millions per U.S. Senator
Source: United States Census Bureau, DWS Investment GmbH, as of 9/8/16
Each Senator from a state like (tiny) Vermont, say, has As for Washington, D.C., America's capital has no voice in
just as much voice as the Senators representing the most the Senate because it is not a state. It does not even get
populous states, such as California, Texas or Florida. In to run its own affairs. It does get to send non-voting dele-
particular, he or she can dramatically slow down proceed- gates to the House and has three electors in the Electoral
ings by withholding unanimous consent. This contributes College.
to the impression of gridlock in Washington.
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) /5Macro Perspectives / January 24, 2020 CIO I VIEW
In 2020, all 435 seats in the House of Representatives and better still. That will partly depend on who Democrats end
35 of the 100 seats in the Senate will be up for grabs. So up nominating.
will 13 state and territorial governorships, as well as plenty
of seats in state legislative chambers. Those state-level 4.THREE TYPES OF OUTCOMES AND HOW AND WHEN
elections are consequential too for federal politics. TO RE-ASSESS THEIR PROBABILITIES
When making probabilistic forecasts, there are often trade-
Party control at the state level will largely determine how offs between which types of scenarios may be useful for
Congressional maps for the House of Representatives are tracking forecast accuracy and which ones people may ac-
redrawn following the 2020 United States Census. Whenev- tually be interested in. For example, our initial U.S. election
er they are in control, both parties have historically tried to probabilities which we started introducing internally a few
ruthlessly gerrymander House districts to maximize their months ago has just three clearly identifiable scenarios for
overall electoral advantage. Since the 1980s, better and the presidency. We currently see a 40% probability of
cheaper mapping software has also made it increasingly Trump being re-elected. Our other scenarios are: a Demo-
simple to manipulate congressional district maps. The re- cratic challenger wins (50%) or another Republican or third-
sults are House districts whose geographic shape defies party candidate wins (10%). We initially introduced that 10%
logic – and more and more Representatives elected in in- bracket to capture both the – at the time fairly distant – im-
creasingly partisan districts. Such parliamentarians have peachment prospect, as well as Trump potentially deciding
little to fear from the general election – but everything from not to run again for health or other reasons.
primary challenges from within their own party.
For investment purposes, that is not all that useful. Effec-
Since the 2010 Census, House district maps have generally tively, it amounts to saying that the 2020 presidential elec-
worked in favor of Republicans, who controlled most state tion is close to a toss-up, with Democrats enjoying only the
legislatures at the time of the last round of redistricting. 12 tiniest of edges compared to Republicans. We will explain
Court challenges of those maps have somewhat reduced why we think so in Section 5.
this source of Republican advantage in recent years. In the
2018 mid-term elections, Democrats won 235 seats or 54% Moreover, our Trump re-election forecast does not tell
of House seats on a 53.4% share of the national vote.13 much about which policies the next president will be able to
pursue. That partly depends on how both parties will do in
Defending a seat is generally easier than winning it in the Congressional elections. Our initial U.S. election scenarios
first place. Incumbent members of the House benefit from do have some advantages we will turn to in Section 5.
wide name recognition (after all, they have run before) and
usually have an easier time than their challengers in raising In parallel, though, we are introducing three slightly more
campaign funding. Despite the advantages of incumbency, user-friendly types of potential outcomes today. Think of
Democrats will probably need to do somewhat better than them as a representative sampling of all the overall 2020
Republicans in terms of how many votes their candidates electoral outcomes you may want to currently consider
get to retain control of the House in 2020. Gerrymandering when making investment decisions:
can explain only part of the likely Republican advantage. a. Trump Triumph: President Trump wins re-election
Another factor is how concentrated Democratic votes are in and Republicans win in both Houses of Congress, to
urban areas. According to most estimates ahead of 2018, which we currently assign a 20% probability. For
Democrats needed to win the popular vote by about 5% to markets, that might mean tax cuts are back on the
7% to win a majority in the House of Representatives. 14 For agenda. Deregulation could continue unimpeded. But
2020, we think that a lead at or even slightly below 5% in so too might the potential for further trade tensions.
national vote shares would probably suffice. But the lower it
gets, the more the resulting Democratic seat count will likely b. Mushy Middle: This set of outcomes is typically
depend on how those votes are geographically distributed, epitomized by various combinations of a divided gov-
putting the Democrats' House majority in danger. ernment and has an overall 65% probability. The
precise outlines of any such combination could have
If they manage to win in 2020, Democrats stand a good big implications for individual sectors. For example,
chance of enshrining their majority in the House for quite a imagine that Republicans hold on to the Senate, but
while. The next round of redistricting will take place in 2022, lose the White House. For political aficionados and
and compared to 2010, it is already clear that their political fracking businesses alike, there is obviously a world
fortunes have markedly improved at the state level. 15 In a of difference between the current status quo of a
good year at the federal level, they might of course do a lot Republican president facing a Democratic House of
12
For example, in the 2012 and 2014 elections, Republicans received about 3.8% and 4.4% more House seats, respectively, than their national margins sug-
gested. See: Trende, Sean: "The Myth of Democrats' 20-Million-Vote Majority," RealClearPolitics, as of 1/5/15
13
That same year Republicans won 199 House seats. You may have noticed that this does not add up to 435 seats. The reason is that results from one con-
gressional district, North Carolina's 9th, were voided, after voting irregularities came to light. That led to a special election in September 2019, which the Republi-
can candidate won.
14
For further details on the 2018 midterms, see: https://www.dws.com/en-us/insights/cio-view/americas/us-midterm-elections-2018/
15
Among the 43 governorships not up for re-election in 2020, for example, Democrats hold 23 and Republicans only 20.
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) /6Macro Perspectives / January 24, 2020 CIO I VIEW
Representatives, and, say, the prospect of a newly ly. Together, we think these two trackers can go a long way
elected President Joe Biden rolling back Trump-era in deciding whether and when to re-assess the likelihood of
deregulation measures. But, at least in the months Republican wins across the board along the lines of the
leading up to Election Day, the prospect of such an 2016 results. Of course, even such Republican improve-
outcome is likely to be relatively neutral for financial ments in polling trends would not guarantee victory. For
markets overall. reasons explained in Section 5, Trump's path in the Elec-
toral College will probably remain exceedingly narrow, un-
c. Progressive Pop: The Democratic nominee wins
less and until he somehow manages to get his approval
the presidency on a far left, progressive policy plat-
numbers close to or above 50%. Based on current data, our
form and Democrats take back the Senate as well as
20% probability for outcome "a" is arguably a touch high. It
retaining control of the House. We currently assign a
partly reflects that it is still early in the campaign. A lot can
15% probability to such an outcome. That pro-
still happen and President Trump will at least partially con-
spect certainly has the potential to scare markets. As
trol the agenda. If his poll numbers improve, our interpreta-
we will see, moreover, it is highly likely that at some
tion of the data will partly depend on context and also how
point of the campaign, markets might be rattled by
far the campaign has advanced.17 But assuming that he
this apparent danger.
does win re-election, it is not that implausible that Republi-
From a market perspective, this way of thinking may allow cans would also win back the House on his coattails.
you to tune out much of the noise surrounding U.S. politics,
One further advantage of keeping an eye on the congres-
probably until the campaign starts in earnest around Labor
sional generic ballot and Trump's approval ratings is that it
Day 2020. Until then, in our view, there are only two key
also furnishes many of the ingredients needed to assess the
questions to consider when thinking about any event. Does
likelihood of a Progressive Pop, our outcome "c." To recall,
it significantly move the needle towards outcome "a" of a
this corresponds to the Democratic nominee winning the
Trump Triumph? Or might it increase the probability of
presidency on a far left, progressive policy platform and
a Progressive Pop, our outcome "c," that the Democratic
Democrats having control of both the House and the Sen-
nominee wins the presidency on a far left, progressive policy
ate.
platform and Democrats take both the Senate and the
House? We currently assign a 15% probability to such an outcome.
There are three reasons why we see such a left-wing takeo-
Moreover, you probably won't need to listen to 24-hour ca-
ver to be a fairly low-probability event:
ble news coverage to find out in time and take into consider-
ation portfolio adjustments. For outcome "a" of a Republican First, the eventual Democratic nominee would need
sweep , we are reasonably hopeful that just two indicators to be someone who decides to / wants to run on a far
will tell you much of what you need to know. We have al- left / progressive platform. At the time of writing, this
ready mentioned the first one, namely Trump approval rat- appears most plausible if Senator Bernie Sanders
ings.16 Historically, presidential approval ratings have corre- were to win the nomination. After all, Sanders is not
lated well with the fate of incumbents, come November. The even a Democrat, but a self-described Democratic
same is true of the second indicator, namely the congres- Socialist. It is of course quite possible that a candi-
sional generic ballot, again using a FiveThirtyEight tracker: date other than Sanders pivots to the far left. Based
https://projects.fivethirtyeight.com/congress-generic-ballot- on her positions and voting history, this seems espe-
polls/ cially plausible if Senator Elizabeth Warren were to
It asks voters which party they support in a congressional win the nomination. However, her chances have re-
election, without mentioning specific candidates. This neatly cently been fading.
sums up how favorable the general climate is for either par- Second, whoever the nominee is, he or she would
ty. At the same time, it tells you how much of a chance Re- need to have enough delegates to get that platform
publicans might have of winning back the House. As a passed by the Democratic National Convention 18,
rough cut-off point, we would suggest watching out for the without having to reach out to moderates. Resistance
Democrats' lead in the congressional generic ballot to fall to against such a takeover of the Democratic Party – let
five percentage points or less. alone the whole country – remains strong, and not
Such a signal would be especially noteworthy if it coincided just in Democratic-Party circles. This was clearly
with President Trump's approval ratings rising and staying at evident in the debates so far during the Democratic
or above 45% in quality-weighted polling averages national- primary process, when it comes, for example, to
16
The FiveThirtyEight Trump approval and disapproval tracker is available at: https://projects.fivethirtyeight.com/trump-approval-ratings/?ex_cid=rrpromo
17
A lot can happen until November, and some of it may well end up favoring one of the more extreme scenarios. However, you would expect such game-
changers to make themselves felt in the polls. A backlash against impeachment, for example, would most probably cut the current lead of 6.7% Democrats
have in the congressional generic ballot. If Elections were held next Tuesday, the same polling on that measure alone would suggest a lower probability of
Republicans regaining the House.
18
The Democratic National Convention takes place every four years in the summer before a presidential election, with the main purpose of confirming the Dem-
ocratic candidate for president and vice president.
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) /7Macro Perspectives / January 24, 2020 CIO I VIEW
providing government-run healthcare or free college glected by his rivals and other office holders. This, in turn,
tuition for all. Such goals have been endorsed, to provided valuable (and widely ignored) pointers to how he
varying degrees, by Senators Warren and Sanders, would perform in Midwestern states that narrowly swung
but are fiercely opposed by most of the other candi- towards Trump in the 2016 general election, giving him a
dates. substantial lead in the Electoral College.
Third, and finally, such a progressive platform would Mindful of that experience, we suggest that the third item
need to be sufficient for Democrats to be so elec- worth watching, once the Democratic primaries start, is the
torally successful in November 2020 that they also tally of state-level results for left-leaning Senators Bernie
win Congress and are able to implement their agen- Sanders and Elisabeth Warren. We will look out for how the
da. At the time of this writing, that is still very much in total of left-leaning Senators Sanders and Warren compares
doubt. Moreover, there would be quite a risk of more to the percentage shares Sanders alone won in each prima-
moderate Democratic lawmakers resisting such ef- ry state in 2016, when facing Clinton. Of particular interest in
forts in Congress, or even abandoning the party all assessing the likelihood of outcome "c" of a Progressive
together. Pop will be how these two progressive candidates fare in
the Midwest and other swing states, particularly those with
The third obstacle to a far-left takeover is intimately related open primaries. That could provide valuable pointers on how
to the broader political backdrop, captured by the congres- a shift to a more progressive policy platform might impact
sional generic ballot and Trump's approval ratings, or even the prospects of both parties in the general election.
more specifically Trump's disapproval ratings. Plainly, the
more unpopular Trump and other Republicans are, the easi- Keeping such a tally is also likely to mitigate what we would
er it is to imagine voters opting for a radical alternative. see as quite a likely risk event to hit at some point in coming
However, we are somewhat doubtful it will come to that. months. Our impression is that among Wall-Street col-
leagues, the chances of Trump winning re-election are prob-
Polls suggest that about two-thirds of Democratic-primary ably being overrated. The same is perhaps true of Mayor
voters would prefer someone who can beat Trump to some- Bloomberg. Despite his recent climb, he is still only polling
one who "agrees with you" (i.e. the voter being polled). 19 at about 6% in national polls among Democratic primary
That has been a key reason for the resilience of former Vice voters. For any "normal" candidate, that would be far too low
President Joe Biden, the rise and fall in the poll ratings of to be taken very seriously. Then again no previous U.S.
young Indiana Mayor Pete Buttigieg, recent improvements presidential candidate had Bloomberg's advantages, includ-
of Minnesota Senator Amy Klobuchar and the steady rise of ing his vast fortune and ownership of one of the world's
Mayor Michael Bloomberg since his late entry into the race. leading news organizations. Still, his path to winning the
All of them are keen to present themselves as centrists, Democratic nomination looks pretty murky.
notably on economic issues. The interest in beating Trump
and staying on a fairly centrist course also appears to be Moreover, markets may be ill-prepared for the all-too-
shared among party elites. And, as political scientists John predictable storyline of one or a few upset victories for left-
Zaller, Hans Noel, David Karol, and Marty Cohen argued in leaning candidates reshaping the race. We say predictable
their influential 2008 book, "The Party Decides," party elites, since unlike presidential general-election polls, primary polls
from fellow politicians to donors and media pundits, have are often wide off the mark. According to analysis of the
historically been quite influential in shaping primary results data since 2000 by FiveThirtyEight, the average polling error
for both main parties. As a result, the winner is usually one in all presidential primaries has been a whopping 8.7 per-
of the candidates thought to be able to succeed in the gen- centage points.21 In such a fluid field, electoral upsets are
eral election, while at the same time being more or less in highly likely. Some of them will probably involve Senators
sync with party opinion.20 Warren or Sanders doing much better than expected in cer-
tain places.
Of course, primary campaigns are partly tests of what the
party opinion is on any given issue. They can also provide Comparing their combined tally to Sanders' percentage vote
tentative clues of how likely an outsider candidate may be to share and delegate count in 2016 should help to avoid read-
succeed in the general election. Back in 2016, Donald ing too much into what might turn out to be state-level outli-
Trump made opposing free trade one of his unique selling ers. Hopefully, however, it would also provide a timely point-
propositions. That put other candidates in a difficult spot er to Senator Warren's wealth-tax proposals, for example,
when trying to make a credible counter offer to voters with- being more of a vote getter than pundits think in the Wash-
out losing business support. Trump was appealing to a cer- ington beltway.
tain type of Republican base voters, which had been ne-
19
https://fivethirtyeight.com/features/issues-voters-see-the-race-differently-from-those-who-prioritize-beating-trump/
20
See: Cohen, Marty et al. (2008): "The Party Decides: Presidential Nominations Before and After
Reform“, Chicago Studies in American Politics, University Of Chicago Press
21
https://fivethirtyeight.com/features/the-polls-are-all-right/
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) /8Macro Perspectives / January 24, 2020 CIO I VIEW
5. SOME FINAL THOUGHTS AND A READING SUGGES- level and some at the state level) won with more than 50%.
TION (The tightest contest was Florida, which Obama carried with
As promised above, there are a few loose ends left to be 50.01% vs. Romney 49.13%.) For any given voter, knowing
tied up. We argued in Section 1 that Donald Trump's 2016 everyone else's voting intention would not have changed the
victory was quite unconvincing by historical standards, sug- results. It generally made sense for each voter, to vote his
gesting vulnerability. In Section 4, however, we mentioned or her "true" preference among the available options.
that the 2020 presidential election is close to a toss-up, with In 2016, by contrast, 15 contests went to a "winner" of less
Democrats enjoying only the tiniest of edges compared to than 50% of votes within those states or districts. Those
the Republicans. The main reason for this discrepancy is contests accounted for 157 electoral votes out of 538, i.e.
the Electoral College. easily enough for an Electoral-College "landslide" of either
At this stage of the campaign, we think that the most rea- Clinton or Trump. In those 14 states, as well as Nebraska's
sonable way to think about the Electoral College is that it second congressional district, both Trump and Clinton were
massively increases uncertainty in both directions. In our so unpopular that enough voters decided to instead vote for
view, it is premature to say which party might benefit from independent or third-party candidates to deprive them both
this way of choosing a president in 2020. Like polling errors, of a 50% win.
the fact that it has favored one party or candidate in one In most places, those votes were pure protest votes, in the
election does not necessarily tell us all that much about the sense that none of these third-party candidates had any
Electoral-College landscape in the next one. More often realistic prospect of winning an Electoral-College vote, let
than not, those preconceptions turn out to be wrong. "The alone the presidency. One interesting exception was Utah,
speculation before the 2000 election was that Mr. Gore where anti-Trump Republican Evan McMullin ran as an in-
might win the Electoral College despite losing the popular dependent candidate with an outside chance of carrying that
vote – exactly the opposite of what happened." 22 In 2004, state. The final Utah result was 46% for Trump, 27% for
the Electoral College instead did favor Democratic candi- Clinton, 22% for McMullin and several other candidates ac-
date John Kerry, who got into spitting distance of winning counting for the rest. This example nicely illustrates why
the presidency, despite lagging Bush by more than 2% in 50% is considered such an important threshold in many
the popular vote. Similarly, in 2012, Obama did much better electoral systems. Theoretically, there were enough Clinton
in the Electoral College against Mitt Romney than his rela- and McMullin voters to deprive Donald Trump of victory. Of
tively slim 3.9% popular-vote edge would have suggested.23 course, that would have required plenty of voters being
And as we pointed out before the midterm elections in 2018, guided not just by their "true" first preference. The incentives
"[…] remember how in 2016 the Electoral College was sup- to do so depended on what each voter expected other vot-
posed to provide Hillary Clinton insurmountable ad- ers to do – both in Utah and in the rest of the United States.
vantages? That was correct in the limited sense that using
the 2012 presidential-election results as your starting point, As it turned out, Utah alone didn't matter in Electoral-
Clinton appeared to have plenty of routes for a majority. Her College terms in 2016. And, in any case, depriving Trump of
floor in the Electoral College also appeared to be quite high. his Utah victory would have required near unanimous tacti-
By contrast, there were only a comparatively limited number cal voting by either all McMullin or all Clinton voters for a
of paths to victory for Trump."24 candidate who wasn't really their first choice.
Without knowing who both major parties end up nominating, But now, consider a state in which Trump is at 47.5%, Clin-
it is very hard to say which particular Electoral College map ton at 47.3% and the third-placed candidate at 3.6%. That
of the years mentioned above is likely to serve as the best was the situation in Michigan, and the third-placed candi-
template. Moreover, Trump's low approval numbers, well date was Libertarian Gary Johnson. In that instance, it is no
below 50%, add an additional element of uncertainty, even if longer so far-fetched to imagine just enough Johnson voters
his eventual rival ends up to be as unpopular as Clinton was waking up the next morning with regret about having a
in 2016. One interesting feature of 2016 that many U.S. share in handing Trump the presidency. The same could
observers appear not to have fully taken onboard is the criti- probably be said about some of the voters of Green-party
cal role third-party candidates played in this vote and pre- candidate Jill Stein (1.1%), the already mentioned anti-
cisely why the contest was so much harder to call "correctly" Trump conservative McMullin (0.2%) and others (0.4%).
than in 2012. That is not the full story of 2016 either, though. In five
states, Clinton won with less than 50%, switching by third-
In 2012, the winners in all 56 Electoral-College contests (i.e. party voters would have made all the difference there, too.
in the 48 winner-take-it-all states as well as in Washington For example, Clinton carried Minnesota with 46.4%, Trump
D.C. and in the congressional districts in Maine and Nebras- was at 44.9% and Gary Johnson at 3.8%.
ka where some Electoral votes are assigned on the district
22
https://fivethirtyeight.blogs.nytimes.com/2012/09/29/poll-averages-have-no-history-of-consistent-partisan-bias/
23
In 2012, Obama won by 332 to Mitt Romney's 206 Electoral votes, incidentally also a much larger margin than Trump's 304 Electoral votes in 2016.
24
See: https://www.dws.com/en-us/insights/cio-view/americas/us-midterm-elections-2018/
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) /9Macro Perspectives / January 24, 2020 CIO I VIEW
Such races are inherently less predictable. After all, whether casting problem that comes along. If those forecasts fail to
to cast a vote against the perceived frontrunner partly de- materialize, they tend to double down on their analysis,
pends on how certain you are the frontrunner will win. The even in the face of mounting evidence that they might be
less certain you are, the more tempting tactical voting be- wrong. Worse still, they might even avoid undertaking the
comes. In that sense, Trump probably benefitted from the sort of tests that risk proving a pet forecast wrong.
perceived unlikelihood of his victory, and not just because
As the ground-breaking work by political psychologist
this might have decreased turnout among Democratic vot-
Philipp Tetlock pointed out, this is precisely the opposite of
ers. Based on Donald Trump's 2016 results, it is impossible
what you should be doing to make good forecasts. 26 Based
to say whether he could have done so again the day after
on a series of forecasting tournaments between 1984 and
defying predictions on November 8, 2016, even when talk-
2003, Tetlock tried to figure out two things. First, how good
ing about the same voters turning out again on November 9.
was the average political expert at making forecasts? And
In our view, part of the point of making good forecasts re- second, were some experts better forecasters than others?
quires acknowledging such uncertainties. That starts with
The answers to both questions were quite surprising. It
how to design scenarios to forecast and track. To be useful
turned out that a vast number of well-paid experts were no
for those purposes, scenarios should be mutually exclusive
better than an algorithm randomly assigning probabilities.
and collectively exhaustive (MECE), if you will forgive a bit
Provocatively but perhaps unwisely, Tetlock described this
of jargon. Moreover, they should enable you to clearly as-
finding as the average expert being no better at forecasting
sess whether the eventual outcome corresponds to the fore-
than a dart-throwing chimp. That rather detracted from his
cast or not.
second, arguably more significant finding. Some experts
In that sense, our initial, simple presidential-election scenari- were actually quite good, and they appeared to share cer-
os (Trump, a Democratic nominee or someone else wins) tain cognitive characteristics.
are useful to us, because it covers all possibilities and will
Good forecasters tend to draw from a wide range of
allow us to say in the end whether we got it right. For our
sources, have few preconceptions and are disciplined in
more user-friendly outcomes a, b and c, introduced in Sec-
keeping track of past forecasts, so that forecast accuracy
tion 4, we tried to be MECE, too. But it's quite a bit harder,
improves over time. In other words, willing to change their
and requires putting a large range of diverse electoral out-
mind as frequently as the evidence seems to suggest, but
comes in our Mushy-Middle class of cases (outcome "b").
not too frequently.
Then, there is the small matter that markets might overesti-
Tetlock suspected that such mental habits are useful across
mate how much damage or good any candidate might do.
a wide range of forecasting domains, that such traits could
Especially if his/her party does not control Congress, the
be learned and that combining solid forecasters into teams
impact any U.S. president can have on the U.S. economy
might boost performance even more. He summed up his
and stock markets tends to be indirect, tangential and sub-
results in a highly accessible book, published just in time for
ject to time lags. That is one of the reasons why few previ-
our 2016 electoral forecast which has been a source of in-
ous presidents invoked stock-market highs as evidence of
spiration within our team ever since. The book is called
their success. It leaves an incumbent highly vulnerable if the
"Superforecasting: The Art and Science of Prediction." 27 It
market turns sour. That is one of the reasons why we think
remains highly recommended reading for anyone making
market faith in the so-called "Trump put"25 beloved by pun-
predictions for a living, including those who manage other
dits might well be tested in 2020.
people's money. Hopefully, it will serve us and perhaps you
Pundits have quite a bad reputation among forecasters. Part well in 2020 and beyond. No matter who ends up winning in
of their pitch is usually to have one or a few big ideas, con- November 2020.
ceptual models or core beliefs and apply them to any fore-
25
The "Trump put" refers to the widespread belief that Trump, priding himself on the stock market's good performance since his inception, wouldn't let the mar-
ket collapse
26
Tetlock, Philipp (2005): “Expert Political Judgement: How Good Is It? How Can We Know?”, Princeton University Press
27
Gardner, Dan and Tetlock, Phillip (2015): “Superforecasting: The Art and Science of Prediction”, Crown
All opinions and claims are based upon data on 1/17/20 and may not come to pass. DWS does not promote any particular outcome in the upcoming elections.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation.
Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, esti-
mates, opinions and hypothetical models that may prove to be incorrect. Source: DWS Investment GmbH
All articles are available on https://go.dws.com/cio-view-articles R-073094-1 (1/20) / 10Macro Perspectives / January 24, 2020 CIO I VIEW
GLOSSARY
Correlation is a measure of how closely two variables move togeth- The winner-takes-all referes to an electoral system, where the can-
er over time. didate or party with the largest number of votes wins everything at
stake. In the context of the U.S. presidential election, for example,
The Electoral College is the body which elects the President and
most states award all electoral votes to the candidate able to secure
the Vice President of the United States. It is composed of electors
the most votes.
from each state equal to that state's representation in Congress.
The United States House of Representatives is a legislative cham-
Gerrymandering refers to the deliberate creation of voting districts ber consisting of 435 Representatives, as well as non-voting dele-
in order to maximize the electoral advantage of one of the parties. gates from Washington, D.C. and U.S. territories. Representatives
The Republican Party (Republicans), also referred to as Grand Old are elected for two-year terms and each state's representation is
based on population as measured in the previous Census.
Party (GOP), is one of the two major political parties in the United
States. It is generally to the right of its main rival, the Democratic The United States Senate is a legislative chamber consisting of 100
Party. Senators, with each state being represented by two Senators. Sen-
ators are elected for six year, overlapping terms in their respective
The Supreme Court is the highest federal court of the United States state.
and the final interpreter of federal constitutional law. It has appellate
jurisdiction over all federal courts. A United States state is one of 50 constituent political entities of the
United States that have statehood, resulting, for example, in being
The United States Congress is the legislature of the federal govern- represented in the Senate.
ment. It is comprised of the Senate and the House of Representa-
tives, consisting of 435 Representatives and 100 Senators.
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